REAL COSTS OF DIY INCORPORATION OF YOUR BUSINESS
You have decided to start a business and are considering creating a corporation for your business. Here is a typical story on how many people approach this subject…
Meet our story character - Sam
Sam graduated with a computer science degree and pursued a job as a programmer. After a few years, he decided to pursue the opportunity of being a business owner. For liability protection, Sam decided that creating a corporation would be a prudent decision.
Potential initial costs of incorporation
Sam contacted a lawyer to inquire regarding incorporation of his business. When he was told that it would cost $900-$1,000 in legal fees for a lawyer to prepare the documents, plus applicable filing fees. Sam thought – “No, thanks. I can do this on my own”. After all, there is plenty free information online. Unsurprisingly, Sam searched for information online and found the necessary forms to create a corporation. He completed the forms, filed them, and paid the necessary government filing fees. A few weeks after filing the forms, Sam received the certificate confirming that his corporation was registered. Sam thought – “fantastic, this only cost me some of my time and the filing fees”. Sam filed the certificate in his filing cabinet and went on to work on the various projects that he had lined up.
Next phase of business lifecycle
The business was booming for Sam and he now had more projects that he could handle on his own. Sam recruited his classmate from university, John, to join him in the business. Since Sam could not match the salary that John was earning at his current job, Sam agreed to give John 25% of his company as long as Sam retained 100% of control. With John joining Sam, it became obvious that they would need some additional equipment – time for a bank loan.
Business hits a snag
When the bank asked for corporate documents, Sam brought in the only thing he had (being the certificate of registration he received from the Companies Office).
Looking at Sam’s single document, the bank’s account manager was not impressed. Sam had nothing to prove that he was a shareholder of the corporation he incorporated himself. He also had no documents to prove whether he owned 100% of the corporation or, as he disclosed to the account manager, that John was also an owner of 25% of the corporation but Sam still had 100% of control.
In account manager’s view, if Sam did not care to take the necessary steps to deal with incorporation properly, is it a sign that Sam may also be careless in other areas of his business? The account manager told Sam to go see a lawyer to get his corporate documents organized properly before they would discuss the potential for the loan any further.
Lawyer's services revisited
Sam once again called the lawyer. After discussions with Sam and reviewing the documents that Sam prepared himself, the lawyer advised that the Articles of Incorporation that Sam prepared on his own would need to be amended to accommodate the arrangements that he made with John. Otherwise, Sam didn’t actually have 100% control as he thought and Articles also did not have provisions to accommodate future planning for Sam’s business. The lawyer also advised that Sam will need corporate organizational documents that should have been prepared after incorporation. Cost? Estimated at $1,300-$1,500 plus the government filing fees to amend the corporation’s Articles, which is several hundred more than it would have cost Sam at the outset if he used a lawyer to deal with incorporation.
What is the point of this story?
The story above is not meant to scare anyone. There are certain circumstances when going through incorporation process on your own may work. However, most sources online (including government websites where you can locate some of the required forms) do not provide information regarding the fact that incorporation is really a 2-step process. First, you deal with selecting the name and filing the registration forms. But then you also need the second step – to organize your corporation – properly issue shares, elect directors, appoint officers, approve by-laws, etc.
Does it really matter to deal with the organizational matters of the corporation (i.e. the second step in the process)? YES, it matters. As you saw from the story above, the costs are likely to be higher later than you would have paid to get it done properly at the outset and you may also encounter obstacles and delays in dealing with other matters for your business (such as financing or even opening a business bank account). Sam’s financing would have been much smoother and faster if he had used a lawyer. Aside from potential additional costs and delays, it also reflects poorly on you as the business owner.
Do the smart thing - hire a professional
Don’t cut corners. Although your budget in starting a business may be limited, using a lawyer to incorporate your business will provide long-term cost savings and benefits that are worth the initial investment.
Need help with incorporating your business or dealing with organizational documents? Check out the CONTACT page on ways to reach me or CLICK HERE to schedule a specific time to discuss.